Massachusetts FAIR Plan Mulls Appeal of Commissioner’s Rate Decision

The Massachusetts Property Insurance Underwriting Association (“FAIR Plan”) said its board of directors will meet next week to decide whether to file an appeal to challenge Insurance Commissioner Joseph G. Murphy’s decision to reject a rate increase request.

The state-created FAIR Plan is the fall-back insurer for Massachusetts homeowners who can’t obtain insurance in the voluntary market. It provides coverage for over 130,000 homeowners, including more than 40 percent of the residences on Cape Cod and the Islands and 12 percent statewide — which represents the largest share of the home insurance market in Massachusetts.

Commissioner Murphy on June 9 announced his decision to reject FAIR Plan’s request to raise its statewide home insurance rates by an average of almost 7 percent. The commissioner said FAIR Plan failed to prove its case that values of hurricane losses from the hurricane model and the cost of reinsurance included in the rate filing fell within a range of reasonableness.

“We received the decision on June 9. We have 30 days from June 9 to file an appeal,” FAIR Plan’s general counsel Robert Tommasino said. If FAIR Plan were to decide to file an appeal, it would be with the Massachusetts Supreme Judicial Court, the state’s highest court.

But Tommasino said overturning the commissioner’s decision in the court would be difficult. FAIR Plan would probably file another rate request next year when the state has a new governor and administration. Incumbent Democratic Gov. Deval Patrick is not seeking a third term, and the election for the state’s next governor will take place on Nov. 4.

“We are planning to have a board of directors’ meeting in order to address this issue and whether or not to appeal, and we are having that meeting late next week,” Tommasino said. “An appeal would not preclude a filing next year.”

“Currently, under this regulatory environment in which we have been finding ourselves for the last several years, the likelihood of successfully overcoming the objections of the commissioner of insurance to us are highly unlikely, no matter what we do,” he said.

In an appeals process, the court would consider whether or not the decision and the rationale of the insurance commissioner as set forth in his opinion were arbitrary and capricious — which is the standard that would have to be met for reversing the decision. “It’s a very high standard to overcome by us,” Tommasino said.

“So one of the reasons why we may not do it [file the appeal] is because even though we feel we have a better position, a better position doesn’t mean that the commissioner’s ruling somehow violated the arbitrary and capricious standard.”

Commenting on how FAIR Plan compares to the voluntary market in rates, Tommasino said that on Cape Cod and the Islands — where FAIR Plan has its biggest market share — its premium is substantially lower compared to the voluntary market. And in other territories or geographic regions in the state, FAIR Plan is comparable to the voluntary market, he said.

“In some instances, we are the lowest but not so dramatically lower as we are on the Cape and the Islands,” he said. “And in some cases we are slightly higher. But there is no place where we have dramatically higher premiums.”

The last time FAIR Plan received a statewide rate increase was in 2006 when Mitt Romney was serving as the governor. That time, the approved rate increase was in the 12-to-13 percent range on average, Tommasino said. Largest increases, including those in Cape Cod and other coastal territories like New Bedford, were capped at 25 percent, while other territories had slight decreases or no increases.

Tommasino said that since the 2006 rate increase, three rate request filings have been rejected. A filing in 2007 was rejected in 2008. In 2009, FAIR Plan sought an average rate increase of 1-to-2 percent, with some territories getting increases and some getting decreases. And with the attorney general, it worked out a resolution that had a slight overall decrease of less than 1 percent, but with more balanced, fairer rates for each territory — with some territories getting 10 percent decreases and some getting 5 percent increases, for example, to reflect a more actuarially sound rate. Additionally, another filing in 2011 was rejected in 2012.

Hurricane Model

Under the current circumstances, Tommasino said, “I would suggest that when it comes to hurricane models, the position — with respect to our filing anyway — is that unless there is a hurricane in Massachusetts, we are not going to be able to secure a rate change,” he said, “because hurricane models, as applied to Massachusetts under this current regulatory administration environment, are not going to be found to be valid for Massachusetts — even though this AIR hurricane model is internationally known and has great credibility internationally from insurers, rating agencies, governments.”

On the reinsurance side, Tommasino said the commissioner wants FAIR Plan to be able to determine why the amount of profit the reinsurers are receiving on a particular program is reasonable. “We have 50 reinsurers. We would have to try to divine what their profit loads are, not just in profit they build into their rates,” he said. “They aren’t all public companies. They won’t all disclose that.”